When shopping for car insurance, the terms “full coverage” and “liability insurance” are thrown around constantly. Understanding the difference between the two is the key to ensuring you have the right amount of protection without overpaying for your premium.

What is Liability Insurance?

Liability insurance is the minimum level of auto insurance required by law in almost every state. It is designed to protect other people. If you cause an accident, your liability insurance pays for the other driver’s vehicle repairs and medical bills. Crucially, it does not pay for any damage to your own car or your own medical bills. It is the cheapest form of car insurance because it offers the most basic level of protection.

What is Full Coverage?

“Full coverage” isn’t actually a single type of policy; rather, it’s a term used to describe a policy that includes Liability, Collision, and Comprehensive coverage. In addition to paying for the damage you cause to others, full coverage pays to repair or replace your own vehicle, regardless of who is at fault. It covers accidents, theft, vandalism, and weather damage.

When to Choose Which

Liability Only: If you drive an older car that isn’t worth very much (e.g., less than $3,000), paying for full coverage might not make financial sense. If your car gets totaled, the payout from the insurance company might be less than what you paid in premiums over the years.

Full Coverage: If you have a newer or expensive vehicle, or if you are currently financing or leasing your car, full coverage is essential (and usually required by your lender). It ensures you aren’t left with a massive bill to replace a valuable asset.